5 Highly Liquid Dividend Stocks Undervalued By The Graham Number

Do you prefer stocks that offer both dividend income and the real possibility of capital gains? We ran a screen with this idea in mind.

We began by screening for highly liquid dividend stocks: those paying dividend yields above 2%, sustainable payout ratios below 50%, and those with current ratios above 3. The current ratio is current assets/current liabilities, so ratios above 3 indicate the company has at least 3 times the liquid assets to cover their short-term liabilities.

We then screened for those that also appear undervalued relative to the Graham Number. The Graham Number is a measure of maximum fair value created by the "godfather of value investing" Benjamin Graham.

It is based off of a stock's EPS and book value per share (BVPS).

Graham Number = SQRT(22.5 x TTM EPS x MRQ BVPS)

The equation assumes that P/E should not be higher than 15 and P/BV should not be higher than 1.5. Stocks trading well below their Graham Number may be undervalued.

Do you think these stocks offer the best of both worlds? Use this list as a starting point for your own analysis.

List sorted by potential upside implied by the Graham Number.

1. Flexsteel Industries Inc. (FLXS): Manufactures, imports, and markets residential and commercial upholstered and wooden furniture products in the United States. Market cap at $140.90M. Price at $20.87. Dividend yield at 2.90%, payout ratio at 20.86%. Current ratio at 4.37. Diluted TTM earnings per share at 1.74, and a MRQ book value per share value at 20.05, implies a Graham Number fair value = sqrt(22.5*1.74*20.05) = $28.02. Based on the stock's price at $20.05, this implies a potential upside of 39.74% from current levels.

2. Cascade Corp. (CASC): Manufactures loading devices and replacement parts primarily for the lift-truck and construction industry. Market cap at $554.82M. Price at $49.87. Dividend yield at 2.81%, payout ratio at 18.82%. Current ratio at 3.74. Diluted TTM earnings per share at 5.46, and a MRQ book value per share value at 29.21, implies a Graham Number fair value = sqrt(22.5*5.46*29.21) = $59.90. Based on the stock's price at $44.92, this implies a potential upside of 33.36% from current levels.

3. Calamos Asset Management Inc. (CLMS): Provides investment advisory services to individuals including high net worth individuals, and institutions. Market cap at $234.52M. Price at $11.40. Dividend yield at 3.30%, payout ratio at 41.95%. Current ratio at 14.99. Diluted TTM earnings per share at 0.88, and a MRQ book value per share value at 9.49, implies a Graham Number fair value = sqrt(22.5*0.88*9.49) = $13.71. Based on the stock's price at $10.71, this implies a potential upside of 27.99% from current levels.

4. Freeport-McMoRan Copper & Gold Inc. (FCX): Engages in the exploration, mining, and production of mineral resources. Market cap at $33.23B. Price at $34.40. Dividend yield at 3.57%, payout ratio at 38.80%. Current ratio at 3.51. Diluted TTM earnings per share at 4.01, and a MRQ book value per share value at 17, implies a Graham Number fair value = sqrt(22.5*4.01*17) = $39.16. Based on the stock's price at $32.03, this implies a potential upside of 22.27% from current levels.

5. FutureFuel Corp. (FF): Engages in the manufacture and sale of specialty chemicals and bio-based products primarily in the United States. Market cap at $432.62M. Price at $10.50. Dividend yield at 3.82%, payout ratio at 42.12%. Current ratio at 6.28. Diluted TTM earnings per share at 0.94, and a MRQ book value per share value at 7.08, implies a Graham Number fair value = sqrt(22.5*0.94*7.08) = $12.24. Based on the stock's price at $10.49, this implies a potential upside of 16.65% from current levels.

*BVPS and EPS data sourced from Yahoo! Finance, all other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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